Increasingly, individuals get into terror-free investing

October 15, 2007

Two years ago, Sudan was the driving force behind terror-free investing. Investors were pulling their money out of companies that supported the regime associated with massacres in the Darfur region. Now there's increasing attention on Iran. Florida has pulled state funds out of companies linked to Iran, and California is poised to do the same.

Individuals can also participate. Mis­souri now offers a terror-free 529 fund open to anyone saving to pay for college. There's also a terror-free mutual fund, and other options are on the way.Recently, the Monitor's Laurent Belsie talked with Andrew Davenport, vice president of Conflict Securities Advisory Group, a Washington, D.C., firm that researches corporate links to terror-­sponsoring states. Here are excerpts from their conversation:

Mr. Davenport: Sudan activists and Sudan-free investing led the charge and perhaps paved the way in some ways … but Iran is up there on the charts as well in the sense that they combine the two most pressing security concerns of today. In the state sponsorship of terrorism, they've been identified a number of years in a row by the US State Department as the leading state sponsor of terrorism. And certainly there are concerns out there reflecting their nuclear program and the possibility, if not the probability, … for a nuclear-weapons program.

When you combine those two issues … you're facing one of the most serious set of security concerns that the United States faces today.

And that's not lost, I ... think, on the American people.

Yet it's states, not individual invest­ors or mutual funds, who have led the movement.

It's not so easy for [average Americans] … to call up their investment adviser or investment-services firm and say: "Hey, I'd like to exclude companies doing business with Iran from this mutual fund." The problem is, that person is just one person of thousands of people who are invested in that fund. And it's taken a little while for some of the financial-services companies to realize that there is actually very broad demand on this topic.

On the institutional side, in the public space, you can deliver messages somewhat more easily. Certainly, there is some resistance to taking these kinds of steps. But when you have a legislature that gets involved and passes regulations that pension systems have to abide by, all of a sudden you've got a rather large pool of money that commands compliance with the issues that are being legislated.

Which states are involved?

Florida was the first state to pass divest-Iran legislation earlier this year. That legislation was somewhat narrow in its scope. It targeted only a portion of the companies doing business in Iran. But one of the interesting things here is that the various states and the way they tackle this issue are different. So Missouri, for example, would pass a screen on their companies that might exclude one set of companies; Florida chooses to go a [narrower] route. And then you've got Louisiana, which has taken a more market-based approach to this. Rather than … a divestment strategy, they've actually taken it upon themselves – the Legislature – to pass a law that requires their pension systems to issue [requests for proposals] for indexes that are terror-free … which actually opens up a whole new option for investors.

In what way?

The investment adviser increasingly, with the introduction of these kinds of products, has the ability to say, actually, there is this one option that we can move your assets to.

So, like investing in the S&P 500 index, you buy companies on the list certified to be terror-free. Are there other options for the average investor?

The Roosevelt Investment Group, for example, was the first company to bring a terror-free mutual fund to market.... UMB Financial Corp. more recently has come to market with [a separate international terror-free] account. So these kinds of products are proliferating in the market. Increasingly, you're going to see this issue really provide an option to individuals to go terror-free if they want to.

Are most of the companies involved with terror-sponsoring countries based in the US or abroad?

The lion's share of companies that are doing business in these countries are not [American]. But that's not to say, of course, that these companies are not relevant to US investors. Clearly, there's a large amount of exposure – a portion of everybody's investments – that is invested in international funds. It is those investments that are [affected].

Some of these companies are pretty big names: Alcatel, Renault, Shell, and Siemens.

The chances are that you are involved in some of these companies. We've screened a lot of portfolios for these kinds of ties and we find that anywhere between 15 and 25 percent of the average portfolio can be exposed to these kinds of [companies]. They are the largest companies in the world. And for the most part, these are the kinds of companies that have risk appetite to be doing business in countries like Iran and Syria, North Korea, and Sudan.

Why do you target those four nations?

The original methodology was to focus on those countries that have been designated by the US as state sponsors of terrorism and that the US government had referenced as having [weapons of mass destruction] programs or being of proliferation concern on WMD.

And the intersection of those two most important issues led us to actually every country on the [US terror-sponsor] list other than Cuba. And that effectively has been the definition that has been adopted by the market.

So even when you see the terror-free investing in Louisiana, for example, where they targeted all the countries, it was Iran, Sudan, Syria, and North Korea.